What is the long term capital gains tax for 2022

Your gains get classified as short-term or long-term based on your holding period. For example, gains from equity funds held for less than a year qualify as short-term capital gains or STCG. Similarly, gains from investments on equity funds held for more than a year are long-term capital gains or LTCG.

Before the amendments in the Union Budget of 2018, investors did not have to pay any taxes on the LTCG earned on equity investments. Since 01 April 2018, long-term capital gains on the sale of listed equity shares have been taxable at the rate of 10% if the capital gain is more than Rs. 1 lakh in a financial year. A surcharge is also applicable on this LTCG that varies from 10% to 37%, depending on the investor's income.

Amendments in the Union Budget 2022

The Union Budget 2022 offers relief to individual taxpayers by capping surcharge to 15% on long-term capital gains. The type of asset and the amount of long-term capital gain does not matter. Before this amendment, the cap of 15% was only applicable on LTCG on equity-oriented mutual funds and listed equity shares. But for other categories of long-term capital gains, an investor needed to pay a surcharge at applicable rates. Capping the surcharge for all assets also helps reduce the tax burden for investors in bonds, startups, and unlisted shares.

As per the announcement, an individual must pay a surcharge calculated on tax liability if the taxable income is over Rs. 50 lakh.

The purpose of this initiative is to reduce the tax liability to promote long-term investments in the equity of startups and benefit unlisted companies in India.

What does it mean for taxpayers?

At present, for an individual assesse, the LTCG tax rate surcharge on assets is 10% if the income is between Rs. 50 lakh and Rs. 1 crore. If the income is more than Rs. 1 crore but less than Rs. 2 crores, the rate is 15%, and if the income is between Rs. 2 crores and Rs. 5 crores, the surcharge is 25%. For individuals with income above Rs. 5 crores, the rate is 37%. Therefore, people earning an income of more than Rs. 2 crores will benefit significantly from this capping. However, there is no change in long-term capital gains on the sale of listed equity shares. These continue to be taxed at the rate of 10% if the capital gain is more than Rs. 1 lakh in a financial year.

Conclusion

The cap on the LTCG tax rate surcharge is a positive change for taxpayers, especially on the sale of assets other than listed equity shares and equity mutual funds. It is also beneficial for taxpayers who had to pay a higher surcharge on one-time capital gains such as on the sale of a property.

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But you may still have gains after years of growth, and the profits could qualify for a 0% tax rate, depending on your earnings.

The thresholds may be higher than you expect — even six figures of joint income for a married couple, financial experts say.

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Many investors think of two rates for long-term capital gains, 15% and 20%, explained Dale Brown, board chair at Salem Investment Counselors in Winston-Salem, North Carolina, which ranked sixth on CNBC's 2022 FA 100 list.

But there are actually four rates — 0%, 15%, 20% and 23.8%, with the 3.8% surcharge for higher earners. "I've had clients with low six-figure incomes who paid no taxes," Brown said. 

Here's how: The rates use "taxable income," calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income, which are earnings minus so-called "above-the-line" deductions.

For 2022, you may qualify for the 0% long-term capital gains rate with taxable income of $41,675 or less for single filers and $83,350 or less for married couples filing jointly.

Six-figure earners may qualify for the 0% rate  

While a couple making $100,000 may assume they don't qualify for the 0% long-term capital gains bracket, Brown said investors need to crunch the numbers.

For example, let's say a retired couple has $30,000 in tax-exempt interest, $25,000 of regular income and $75,000 in long-term capital gains and dividends. Their gross income is $100,000 since it doesn't include the tax-exempt interest. 

After subtracting the standard deduction of $27,300 — $25,900 plus an additional $1,400 for a filer over 65 — they're left with $72,700 in taxable income, falling within the 0% long-term capital gains tax bracket for 2022. 

Part of your earnings may be in the 0% bracket 

Even if a couple's taxable income is above $83,350, part of their earnings may still fall into the 0% long-term capital gains bracket, Brown said.

Let's say the same retired couple had $30,000 in tax-exempt interest, $25,000 of regular income and $100,000 in long-term capital gains and dividends.

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In this case, their gross income is $125,000 and taxable income is $97,700. Since the $27,300 standard deduction exceeds the $25,000 of regular income, the $97,700 is entirely long-term capital gains and dividends.

This means $83,350 is taxed at the 0% rate and the couple owes 15% long-term capital gains taxes on the remaining $14,350.

"That's the benefit of the 0% bracket," Brown said.

Consider 'tax-gain harvesting' in the 0% bracket

When the stock market is down, many investors focus on tax-loss harvesting, or using losses to offset other profits.

But you may also explore harvesting gains if your assets are still up from previous years, said Cory Robinson, vice president and portfolio manager at Tom Johnson Investment Management in Oklahoma City, which ranked No. 30 on the FA 100 list.

"The benefit is there are zero taxes, whether it's dividends or capital gains" as long as you're below the taxable income threshold, he said.

That’s the beauty of taking gains. You can immediately reinvest.

Cory Robinson

Vice president and portfolio manager at Tom Johnson Investment Management

For investors in the 0% bracket, it's possible there's a chance to reduce taxes on future profits.

Since taxes are based on the difference between the value upon sale and original purchase price, you can sell the profitable asset and repurchase to increase the purchase price.

"That's the beauty of taking gains: You can immediately reinvest," Robinson said, explaining how investors don't need to worry about the so-called wash sale rule.

Although the wash sale rule blocks harvested losses if you buy a "substantially identical" asset within the 30-day window before or after the sale, the same rule doesn't apply to gains, he said.

Harvesting gains during lower-earning years

Whether you're selling assets for income or leveraging a long-term tax strategy, there may be opportunities to harvest gains during lower-earning years, Brown said.

For example, there may be an income gap if you retire but don't immediately receive Social Security, a pension or withdrawals from pretax retirement accounts, he said.

You may also have lower taxable income during a year with a temporary job loss, Brown said.

"The most important thing is the timing," Robinson added, explaining how it's critical to estimate your taxable income before attempting to harvest gains.

Clarification: An earlier version of the story used a rounded number for the 2022 standard deduction that was slightly smaller. The story has been clarified with actual figures.

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